Define: Municipal Bonds

Municipal bonds are debt securities issued by state and local governments or their agencies to finance public projects such as schools, highways, and water treatment facilities.

When you purchase a municipal bond, you are essentially lending money to the government entity issuing the bond. In return, you receive regular interest payments and the principal amount back at maturity.

The interest earned from most municipal bonds is exempt from federal income tax. However, some bonds may be subject to alternative minimum tax (AMT) or state and local taxes.

Like any investment, municipal bonds carry risks. The main risks include credit risk (the issuer’s ability to repay the debt), interest rate risk (fluctuations in interest rates affecting bond prices), and liquidity risk (the ability to sell the bond at a fair price).

Municipal bonds can be purchased through a broker or financial advisor, or through online platforms that offer bond trading services.

Yes, municipal bonds can be sold before they mature. However, the price you receive may be higher or lower than the face value, depending on market conditions and the bond’s specific features.

General obligation bonds are backed by the full faith and credit of the issuing government entity, while revenue bonds are backed by the revenue generated from a specific project or source (e.g., tolls, water fees). General obligation bonds are considered less risky.

Municipal bonds can be suitable for individual investors seeking income and tax advantages. However, it is important to assess your risk tolerance, investment goals, and consult with a financial advisor before investing.

While municipal bond defaults are relatively rare, they can occur if the issuing government entity faces financial distress or bankruptcy. It is crucial to research the creditworthiness of the issuer before investing.

Credit rating agencies such as Moody’s, Standard & Poor’s, and Fitch provide credit ratings for municipal bonds. These ratings reflect the agencies’ assessment of the issuer’s ability to repay the debt. Additionally, analyzing the issuer’s financial statements and economic conditions can help evaluate creditworthiness.